Celebrities Are Often in Debt to the Tax Man

Dennis Cauchon, USA TODAY

Tuesday, 17 Apr 2012 | 11:00 AM ETUSA Today

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Lionel Ritchie

On April 2, superstar Lionel Richie performed a song from his smash new album Tuskegee to wild applause on The Ellen DeGeneres Show. That same day, the Internal Revenue Service slapped a $1.1 million lien on the singer for income taxes allegedly unpaid in 2010.

Today is the deadline for Americans to file their federal income taxes. Celebrities and entertainers are no different, except—unlike most taxpayers—they often have huge incomes that vary wildly from year to year. This is a recipe for tax trouble that can follow even the most successful performers.

Lionel Richie is one of the top-selling recording artists of all time and has no history of financial problems. With more than 25 gold and platinum records behind him and a new album near the top of the charts in North America and Europe, Richie is unlikely to have trouble paying a $1.1 million tax bill. "I was recently made aware of the situation by my new team and it is being handled immediately," he said in a statement.

Many other entertainers—the famous or once famous—are not so lucky. They may lose their mansions, fancy cars and expensive lifestyles unless they are rescued by a hit that makes them rich again.

USA TODAY examined public records and found more than 50 people prominent in the entertainment industry who owe at least $50,000 in back taxes to the federal government, according to IRS tax liens. Many also are behind on state income taxes, according to legal filings.

The tax-challenged include some tabloid favorites: Lindsay Lohan owes $230,904, IRS filings show. Others are respected performers, athletes, and award-winning screenwriters or directors several years removed from their last big success.

Actress Sally Kellerman, nominated for an Oscar for her role as "Hot Lips" in the 1970 movie M*A*S*H, owes $769,861 in back taxes to the federal government, plus $201,311 to the state of California, according to federal and state liens.

Musicians appear especially prone to tax problems. Singer Roberta Flack, who had era-defining hits in the early 1970s, has $156,824 in federal tax liens.

USA TODAY tried to contact all people mentioned in the story through agents, publicists, accountants, lawyers and via some written letters. Several agreed to comment on the tax liens. Others declined or may not have received the request.

Federal tax liens provide a rare but imperfect glimpse into the private finances of the rich and famous. The IRS files liens in county courthouses when it believes taxpayers are dodging their obligation, usually from several years earlier and after warning letters have failed to get the money.

The IRS does not discuss or publicize the liens, nor does it provide a database or list of the filings. As a result, tax debts of well-known performers — or investment bankers, doctors and plumbers — can hide in plain sight at a county courthouse. USA TODAY used the Nexis database service to search tax liens in affluent ZIP codes.

What is a federal tax lien? The IRS says it is "the government's legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government's interest in all your property, including real estate, personal property and financial assets."

In other words, the government thinks you're a deadbeat and is warning that it may seize your house, car, bank accounts, gold records and Oscar statues if you don't pay. In practice, the government prefers cash and avoids taking houses and other property except as a last resort. Country legend Willie Nelson lost nearly everything to the IRS at auction in 1991. (He hid his guitar.)

A federal tax lien is almost always a sign of financial problems, says Cincinnati tax lawyer Howard Levy, who publishes the IRS and the Law blog. People who live chaotic lives or are under financial stress often skip tax payments or don't file returns at all, he says. This is a big mistake. IRS penalties can equal nearly 50% of the original tax burden. Then the IRS applies interest monthly on both the unpaid tax and the penalty.

The lien is a snapshot of what the IRS claims it is owed in taxes, penalties and interest at the time the lien is prepared. The public amount doesn't change until the entire tax bill is paid, so it doesn't reflect payments to reduce what's owed or how the obligation grows as penalties and interest accumulate. "People usually owe more than the amount in the lien," Levy says.

Records don't show when taxpayers are working with the IRS or have reached a deal to settle the debt.

The IRS is sometimes wrong or overstates what is owed, but not often, Levy says. If you don't file a return, for example, the IRS will estimate what you owe in a formula that can be unrealistic. The IRS filed a $261.4 million tax lien in January against New Orleans rapper Juvenile (Terius Gray).

In rare instances, wealthy people may not know what they owe the IRS, Levy says. For example, limited partnerships can sometimes generate "phantom income" — a tax obligation that can occur years before the money actually arrives.

But mostly, entertainers get in tax trouble because they expect peak earnings to last indefinitely, says Dennis McGoldrick, a veteran bankruptcy lawyer in Torrance, Calif. "Their income revs up, and their spending revs up. These people don't save any money. They get a big house. Then work dries up and they can't pay their taxes. It's a fairly common occurrence," he says.

An entertainer may see income drop unexpectedly from $10 million a year to $1 million after a canceled TV show, a movie that bombs or a concert tour cut short by a bandmate's illness. Mortgage payments and investing in the next project may take priority over paying the estimated quarterly income taxes the IRS wants.

The IRS generally will settle the tax debt with a five-year payment plan based on an entertainer's current assets and earnings, McGoldrick says. But that can force performers to face harsh realities about their careers and lifestyles.

For example, the IRS expects tax debtors to sell their homes — often mansions — to convert the home equity into cash and re-direct the mortgage payment to the government. "It's hard to explain why you're paying $50,000 a month on a mortgage rather than giving that money to the IRS," says Levy, the tax lawyer.

Comedian Sinbad (David Adkins), who had HBO specials and his own TV show in the early 1990s, tried to save a home he'd bought when he hit it big. He even transferred the title of the $2 million hilltop home to his brother to protect it from the IRS, court documents show. The government challenged him in court and won. Sinbad owed more than $8 million in taxes and penalties.

In a bankruptcy filing, Sinbad estimated his current earning power had fallen to about $100,000 a year. He didn't even have money to convert his HBO specials to digital to make them sellable, the filing said.

Sinbad declined comment. But he did turn his tax troubles into a new reality show —Sinbad: It's Just Family— on the WE TV network. The first episode: Sinbad moves back in with his ex-wife.

A sudden rescue from the IRS' grasp is always possible in show business, courtesy of an unexpected hit song or movie.

Actor Robert Downey Jr. fell more than $2 million behind on state and federal income taxes while in jail and on drugs, tax liens show. After getting clean, the star of Iron Man and other blockbusters paid off the debts.

Actor Terry Crews stars in the TBS comedy Are We There Yet? He is also featured in The Family Crews, a reality show on BET that follows his family and wife, former gospel singer Rebecca Crews. The IRS filed a $521,581 tax lien against the couple's property in November.

"We have experienced tremendous success in the entertainment industry and are blessed to do what we love," Terry Crews says. "But sometimes business is good and sometimes it's not. It's in these various periods of making either a little or a lot, depending on the job, location and opportunity, that this tax liability developed."

He says he and his wife have been working closely with the IRS and have paid off the majority of what they owe. The IRS released a separate $205,913 lien against the couple in 2010.

The IRS filed a $492,583 tax lien in December against a hot couple — R&B artist Robin Thicke and his actress wife, Paula Patton (Mission: Impossible — Ghost Protocol). "When they were made aware of it, they immediately paid it," says their publicist, Amanda Silverman. The IRS, however, hasn't released the lien, a process that can take 30 days.